AMERICAN ECO CORP, 10-Q, 1999-07-15

AMERICAN ECO CORP
10-Q, 1999-07-15
MISCELLANEOUS REPAIR SERVICES

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<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 1999
------------

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
------------ --------------

Commission File Number: 001-10621
---------

AMERICAN ECO CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)

ONTARIO, CANADA 52-1742490
---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

154 UNIVERSITY AVENUE, TORONTO, ONTARIO M5H 3Y9
---------------------------------------------------
(Address or principal executive offices) (Zip Code)

(416) 340-2727
----------------------------------------------------
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---

As of May 31, 1999, there were 21,710,180 shares of Common Shares, no par value,
outstanding.

<PAGE> 2

AMERICAN ECO CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>

PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1. Financial Statements (unaudited)

Consolidated Balance Sheets:
May 31, 1999 and November 30, 1998...................................................3

Consolidated Statement of Income:
Three Months and Six Months Ended May 31, 1999
and May 31, 1998.....................................................................5

Consolidated Statement of Changes in Financial Position:
Six Months Ended May 31, 1999
and May 31, 1998....................................................................6

Notes to Consolidated Financial Statements.............................................7

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................10

PART II. OTHER INFORMATION

Item 1. Litigation.....................................................................................15

Item 2. Changes in Securities..........................................................................15

Item 4. Submission of Matters to a Vote of Security Holders............................................15

Item 6. Exhibits and Reports on Form 8-K...............................................................15

Signatures..............................................................................................17
</TABLE>

<PAGE> 3

ITEM 1. FINANCIAL STATEMENTS

PART I

FINANCIAL INFORMATION

AMERICAN ECO CORPORATION
CONSOLIDATED BALANCE SHEET

(United States Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>

May 31, November 30,
1999 1998
---------------- ----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash............................................................ $ 18,155 $ 21,821
Accounts receivable, trade, less allowance for doubtful
accounts of $1,607 in 1999 and $2,378 in 1998, respectively 62,805 50,793
Current portion of notes receivables............................ 6,827 5,080
Costs and estimated earnings in excess of billings............. 15,095 11,202
Inventory....................................................... 23,156 23,080
Refundable income taxes......................................... 2,419 2,419
Deferred income tax............................................. 11,879 9,464
Prepaid expenses and other current assets....................... 8,379 4,427
---------------- ----------------
TOTAL CURRENT ASSETS........................................ 148,715 128,286
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, NET 56,015 54,835
---------------- ----------------

OTHER ASSETS
Goodwill, net of accumulated amortization of $3,349 in 1999
and $2,781 in 1998, respectively............................. 32,294 30,767
Notes receivable................................................ 23,120 17,504
Investments..................................................... 3,215 13,855
Other assets.................................................... 5,210 5,136
---------------- ----------------
TOTAL OTHER ASSETS.......................................... 63,839 67,262
---------------- ----------------

TOTAL ASSETS................................................ $ 268,569 $ 250,383
================ ================

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

<PAGE> 4

AMERICAN ECO CORPORATION
CONSOLIDATED BALANCE SHEET

(United States Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>

May 31, November 30,
1999 1998
---------------- ----------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and accrued liabilities........................ $ 33,454 $ 32,584
Current portion of long-term debt............................... 445 630
Billings in excess of costs and estimated earnings.............. 5,492 3,834
---------------- ----------------
TOTAL CURRENT LIABILITIES................................... 39,391 37,048
---------------- ----------------

LONG TERM LIABILITIES
Senior notes.................................................... 118,000 118,000
Long-term debt.................................................. 3,239 2,689
Line of credit.................................................. 12,146 -
Deferred income tax liability................................... 54 1,334
Minority interest............................................... 3,035 -
Other liabilities............................................... 683 1,074
---------------- ----------------
TOTAL LONG-TERM LIABILITIES................................. 137,157 123,097
---------------- ----------------

TOTAL LIABILITIES........................................... 176,548 160,145
---------------- ----------------

SHAREHOLDERS' EQUITY
Share capital................................................... 90,492 89,854
Contributed surplus............................................. 2,845 2,845
Cumulative foreign exchange..................................... (1,048) (2,470)
Retained earnings............................................... (268) 9
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY.................................. 92,021 90,238
---------------- ----------------

TOTAL LIABILITIES & SHAREHOLDERS' EQUITY.................... $ 268,569 $ 250,383
================ ================

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

<PAGE> 5

AMERICAN ECO CORPORATION
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE AND SIX MONTHS ENDED MAY 31
(United States Dollars in thousands)
(Unaudited)

Three Months Ended May 31 Six Months Ended May 31
------------------------ -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE $ 64,034 $ 53,151 $ 133,217 $ 106,312
---------- ---------- ---------- ----------

COSTS AND EXPENSES
Direct costs of revenue...................... 55,056 44,477 111,609 85,775
Selling, general, and administrative expenses 6,188 6,610 11,743 12,674
Interest expense, net........................ 1,645 910 4,157 1,670
Loss on early extinguishment of debt......... - 2,400 - 2,400
Depreciation and amortization................ 1,179 1,120 2,239 2,085
---------- ---------- ---------- ----------
Total operating costs........................ 64,068 55,517 129,748 104,604
---------- ---------- ---------- ----------

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR (RECOVERY OF) INCOME TAXES.........
(34) (2,366) 3,469 1,708

PROVISION FOR (RECOVERY OF) INCOME TAXES......... (12) (828) 1,180 598
---------- ---------- ---------- ----------

INCOME (LOSS) FROM CONTINUING OPERATIONS......... (22) (1,538) 2,289 1,110

LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME
TAX BENEFIT...................................... (1,231) (92) (2,567) (580)
---------- ---------- ---------- ----------

NET INCOME (LOSS)................................ $ (1,253) $ (1,630) $ (278) $ 530
---------- ---------- ---------- ----------

Basic earnings (loss) per common share
Earnings (loss) from continuing operations... $ 0.00 $ (0.08) $ 0.11 $ 0.06
Loss from discontinued operations............ (0.06) 0.00 (0.12) (0.03)
---------- ---------- ---------- ----------
Net earnings (loss) per common share......... $ (0.06) $ (0.08) $ (0.01) $ 0.03
========== ========== ========== ==========

Fully diluted earnings (loss) per common share
Earnings (loss) from continuing operations... $ 0.00 $ (0.08) $ 0.12 $ 0.06
Loss from discontinued operations............ (0.06) 0.00 (0.13) (0.03)
---------- ---------- ---------- ----------
Net earnings (loss) per common share......... $ (0.06) $ (0.08) $ (0.01) $ 0.03
========== ========== ========== ==========

Weighted average number of shares used in
computing earnings per common share
Basic........................................ 21,676,482 20,604,111 21,643,695 20,295,522
========== ========== ========== ==========
Fully diluted................................ 21,676,482 20,604,111 26,071,120 20,295,522
========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements

<PAGE> 6

AMERICAN ECO CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE SIX MONTHS ENDED MAY 31
(UNITED STATES DOLLARS IN THOUSANDS)
(UNAUDITED)

1999 1998
--------- ---------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ............................................................. $ (278) $ 530
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Loss on early extinguishment of debt ............................ - 2,400
Depreciation and amortization ................................... 2,239 2,085
Change in deferred income taxes ................................. (271) (153)
Change in accounts receivable ................................... (4,929) (3,151)
Change in notes receivable ...................................... (335) 3,022
Change in costs and estimated earnings in excess of billings .... (3,416) (7,777)
Change in inventory ............................................. (1) (1,447)
Change in prepaid expenses ...................................... (1,758) (2,462)
Change in other assets .......................................... 358 (1,503)
Change in accounts payable ...................................... (5,656) 3,041
Change in billings in excess of costs and estimated earnings .... (1,823) (327)
Change in other long-term liabilities ........................... (391) (272)
--------- ---------

Net cash used in operating activities .................................. (16,261) (6,014)
--------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................ (1,533) (1,570)
Acquisition of business, net of cash received ................... 820 -
Increase in minority interest ................................... (338) -
Decrease (increase) in investment ............................... 695 (6,102)
--------- ---------
Net cash used in investing activities .................................. (356) (7,672)
--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior notes ...................................... - 116,139
Proceeds from notes payable ..................................... - 3,500
Proceeds from long-term debt .................................... 11,576 408
Principal payments on notes payable ............................. - (58,838)
Principal payments on long-term debt ............................ (47) (12,404)
Stock issuance costs ............................................ - (18)
Issuance of common stock ........................................ - 1,394
--------- ---------
Net cash provided by financing activities .............................. 11,529 50,181
--------- ---------

EFFECT OF FOREIGN EXCHANGE FLUCTUATIONS ON CASH ....................... 1,422 (136)
--------- ---------

NET INCREASE (DECREASE) IN CASH ........................................ (3,666) 36,359

CASH AT BEGINNING OF PERIOD ............................................ 21,821 1,259
--------- ---------

CASH AT END OF PERIOD .................................................. $ 18,155 $ 37,618
========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

<PAGE> 7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X
promulgated by the Securities and Exchange Commission. Such financial statements
do not include all disclosures required by generally accepted accounting
principles for annual financial statement reporting purposes. However, there has
been no material change in the information disclosed in the Company's annual
consolidated financial statements dated November 30, 1998, except as disclosed
herein. Accordingly, the information contained herein should be read in
conjunction with such annual consolidated financial statements and related
disclosures. The accompanying financial statements reflect, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the results for the interim periods
presented. Results of operations for the three and six months ended May 31, 1999
are not necessarily indicative of results expected for an entire year. The
November 30, 1998 balance sheet was derived from the audited financial
statements but does not include all disclosures required by generally accepted
accounting principles.

The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries; Chempower, Inc., Specialty Management
Group, Inc. /d/b/a CCG, Industra Service Corporation ("Industra"), MM Industra,
Ltd. ("MMI"), Separation and Recovery Systems, Inc. ("SRS"), The Turner Group,
United Eco Systems, Inc., Cambridge Construction Service Corporation, and Lake
Charles Construction Company, Inc. As of November 1998, the Company owns
approximately 81.9% of the outstanding common stock of U.S. Industrial Services,
Inc. (USIS). Accordingly, the operating results of USIS are included in the
consolidated financial statements of the Company.

Recognition of Revenue: The Company recognizes revenues and profits on contracts
using the percentage-of-completion method. Under the percentage-of-completion
method, contract revenues are accrued based upon the percentage that accrued
costs to date bear to total estimated costs. As contracts can extend over more
than one accounting period, revisions in estimated total costs and profits
during the course of work are reflected during the period in which the facts
requiring the revisions become known. Losses on contracts are charged to income
in the period in which such losses are first determined. The
percentage-of-completion method of accounting can result in the recognition of
either costs and estimated profits in excess of billings, or billings in excess
of costs and estimated profits on uncompleted contracts, which are classified as
current assets and liabilities, respectively, in the Company's balance sheet.

Foreign Exchange: The functional currency for the Company is the U.S. dollar,
with the exception of American Eco Corporation, Industra, and MMI whose
functional currency is the Canadian dollar. The translation of the Canadian
dollar into U.S. dollars is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period. Gains and
losses resulting from the translation of American Eco Corporation, Industra, and
MMI's financial statements are classified as a component of shareholders'
equity.

Reclassifications: Certain reclassifications have been made to the prior period
financial statements to conform with the current period presentation.

<PAGE> 8

NOTE 2. INVENTORY

The components of inventory at May 31, 1999 and November 30, 1998 are as
follows:

May 31, 1999 November 30, 1998
---------------- -----------------
<S> <C> <C>
Raw Materials $ 9,428 $ 8,388
Consumable Supplies 3,665 4,207
Finished Goods 10,063 10,485
---------------- -----------------
$ 23,156 $ 23,080
================ =================
</TABLE>

NOTE 3. U.S. INDUSTRIAL SERVICES, INC.

As of November 1998, the Company owns approximately 81.9% of the outstanding
common stock of U.S. Industrial Services, Inc. (USIS). Accordingly, the
operating results of USIS are included in the consolidated financial statements
of the Company.

In November 1998, USIS sold the assets of Manta and transferred related
liabilities, including the credit facility, to Kenny Industrial Services,
L.L.C., for $23.0 million consisting of a combination of cash and notes.

On December 31, 1998, USIS sold the assets of P.W. Stephens Residential Inc. and
transferred its liabilities, to American Temporary Sanitation Inc. for $2.4
million consisting of $1.0 million in cash and a five year promissory note for
$1.4 million payable quarterly through 2004, together with interest at prime
rate plus 2.5% per annum.

On July 1, 1999, USIS announced that it has signed a definitive agreement to
acquire International Fidelity Holdings Corp., a re-insurance company based in
Dallas, Texas, subject to regulatory and shareholder approval.

NOTE 4. LINE OF CREDIT

In May 1999, the Company and its principal subsidiaries entered into a Credit
Agreement with General Electric Capital Corporation as lender and agent for
additional lenders. The Credit Agreement provides for a revolving credit
facility (the "Revolver") of up to $30 million to be used for working capital
and other general corporate purposes and is based upon certain eligible accounts
receivable. The Revolver has a two-year term, subject to two automatic one year
extensions at the mutual discretion of the Company and the lenders. Borrowings
under the Revolver will accrue interest at a rate equal to 2% above the
commercial paper rate.

NOTE 5. DISCONTINUED OPERATIONS

During the second quarter of 1999, management adopted plans to discontinue the
switchgear operations of Chempower and the engineering business of Industra. The
switchgear business was sold on June 1, 1999 and the Company expects to divest
the engineering business within the next six months.

Sales from discontinued operations were $4,330 and $6,309 for the three months
ended May 31, 1999 and 1998 and $8,912 and $11,583 for the six months ended May
31, 1999 and 1998, respectively.

Losses from discontinued operations for the six months ended May 31, 1999 and
1998 were $2,567 (net of $1,323 income tax benefit) and $580 (net of $313 income
tax benefit), respectively.

Interest expense has been allocated based on intercompany debt/asset balances.
After-tax interest expense of $348 has been included in the loss from
discontinued operations. Discontinued operations have not been separated in the
consolidated statement of cash flows; therefore, amounts for certain
captions will not agree with the respective consolidated statements of
operations.

<PAGE> 9

NOTE 6. LITIGATION

At May 31, 1999, there were various claims and disputes incidental to the
business. The Company believes that the disposition of all such claims and
disputes, individually or in the aggregate, other than disclosed below, should
not have a material adverse affect upon the Company's financial position,
results of operations or cash flows.

American Eco Corporation recently learned that the United States Attorney for
the Middle District of Louisiana (the "US Attorney for the Middle District")
advised Advanced Coil Industries ("ACI") a division of Chempower, Inc., a
subsidiary of the Company acquired in March 1997, that ACI and several others
are the subject of a Federal criminal grand jury investigation in connection
with possible improper markings on coated steel which had occurred in 1994 and
1995 prior to the Company's acquisition of Chempower. The U.S. Attorney for the
Middle District and ACI have agreed that in the event criminal charges are
filed, no criminal charges will be filed against ACI until on or after December
1, 1999. The U.S. Attorney for the Middle District has also advised ACI that a
civil suit has been filed under seal in Baton Rouge, Louisiana in which ACI is
one of several names or potential defendants alleged to have violated the false
claims act. As the civil suit was filed under seal and is unavailable for ACI's
review, the Company has not had the opportunity to review the factual basis of
the alleged claim nor the method by which damages might be calculated. However,
if a potential action by the U.S. Attorney for the Middle District and/or under
the civil action against ACI is successful, it could be material to the
financial position of the Company.

NOTE 7. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES

The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada ("Canadian Basis") which
differ in certain respects from those principles and practices that the Company
would have followed had its consolidated financial statements been prepared in
accordance with accounting practices generally accepted in the United States
("U.S. Basis").

Differences between U.S. and Canadian GAAP may have caused the Company to not
present the switchgear business of Chempower and the engineering business of
Industra as discontinued operations. This difference would not have an impact on
net earnings, but the Company would not have presented the income statement
disclosure "Earnings from Continuing Operations."

In the last quarter of fiscal year 1998, the Company recorded a charge of $13.8
million related to the write-off of its investment in Dominion Bridge
Corporation. The Company has no continuing involvement in Dominion Bridge
Corporation. During the three months ended February 28, 1998, the Company
purchased 1,923,077 shares of Dominion Bridge for $5.0 million. Under Canadian
Basis, this investment was accounted for as a long-term investment and the
Company had determined that an other than temporary decline in value had not
occurred in this investment was as of February 28, 1998. Under U.S. Basis, the
Company's investment in Dominion Bridge would have been accounted for pursuant
to Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under SFAS No. 115, the
Company's investment in Dominion Bridge would have been classified as an
available-for-sale investment which would have required the Company to carry the
investment at its market value of $3.7 million at February 28, 1998 with a
difference in the Company's carrying value presented as an unrealized loss of
marketable securities in shareholders' equity.

NOTE 8. SUBSEQUENT EVENT

The Company has entered into an Option Agreement to sell substantially all of
its USIS shares at a price of $1.90.
9

<PAGE> 10

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The results of operations for the six months ended May 31, 1999 are not
necessarily indicative of the results for future periods. The following
discussion should be read in conjunction with the unaudited financial statements
included herein and the notes thereto, and with the audited financial statements
and notes thereto for the year ended November 30, 1998.

OVERVIEW

American Eco Corporation (the "Company" or "American Eco") through its
subsidiaries is a leading provider of industrial support, specialty fabrication
and environmental remediation services to principally three industry groups: (i)
energy, (ii) pulp and paper, and (iii) power generation. The Company also
provides construction management services to a select group of commercial owners
and developers. The Company offers its customers a single-source solution for an
extensive array of support services such as equipment and facility repair,
maintenance, refurbishment, retrofit and expansion. Specialty fabrication
services offered by the Company include: the construction of decks, well jackets
and modules for offshore oil and gas platforms; the fabrication of piping,
pressure vessels and other equipment used in process industries; the fabrication
of bus ducts and precision sheetmetal; and the erection of structural steel
support systems. The Company also manufactures, sells, installs and operates
SAREX(C) oil filtration and separation systems worldwide.

The Company has strategically positioned itself as a single-source
provider of support services, which can be performed by an outside service
company with greater efficiency, safety and cost-effectiveness. By outsourcing
support services, the Company's customers can focus on their core manufacturing
processes, reduce operating costs, improve safety and conserve human and capital
resources.

American Eco's business has benefited from several market trends. First
is the shift among industrial companies toward outsourcing maintenance and other
non-core services. Companies have increased their use of outside contractors to
control their internal labor and insurance costs and to eliminate the need for
maintaining expensive, under-utilized equipment. Second, the mounting costs of
training skilled employees, maintaining a satisfactory safety record and
complying with rapidly changing government regulations favors experienced
outsourcing providers. Third is a preference by customers to simplify vendor
management by working with larger, single-source providers which have broad
geographic coverage. These trends have driven American Eco's acquisition
strategy to consolidate regionally fragmented service providers in the United
States and Canada. American Eco has realized significant growth through
acquiring companies which provide services to several industries in different
geographical regions. Between fiscal 1993 and fiscal 1998, the Company acquired
nine businesses, including two environmental companies which were subsequently
sold in August 1997. The Company's revenues and net income were $7.6 million and
$0.3 million for the fiscal year ended November 30, 1993 and were $299.8 million
and a loss of $30.2 million for the fiscal year ended November 30, 1998. The
Company's strategy is to continue to broaden and deepen its geographic presence,
expand service offerings or client base and contribute to earnings growth.

American Eco believes it has achieved a competitively advantaged
position in the industrial support, specialty fabrication and construction
management markets it serves by consistently providing high-quality,
cost-effective services on a safe and timely basis. The Company's key
competitive strengths include: (i) long-standing customer relationships, (ii) an
outstanding safety and quality record, (iii) a broad offering of value-added
services and capabilities, (iv) the ability to provide its services in the
United States and Canada, and (v) an experienced management team in the field
and at the corporate level.

At May 31, 1999, the Company operated primarily through the following
first and second tier subsidiaries: C.A. Turner Construction Company, a Delaware
corporation ("C.A. Turner" and, together with Action Contract Services Inc., a
Delaware corporation, the "Turner Group"); Cambridge Construction Service Corp.,
a Nevada corporation ("Cambridge"); Lake Charles Construction Company, a
Louisiana corporation ("Lake Charles Construction" and, together with its
wholly-owned subsidiaries, the "Lake Charles Group"); Industra Service
Corporation, a British Columbia, Canada corporation ("Industra Service"); MM
Industra, Limited, a Nova Scotia, Canada corporation ("MM Industra"); United Eco
Systems, Inc., a Delaware corporation ("United Eco"); Separation

<PAGE> 11

and Recovery Systems, Inc., a Nevada corporation ("SRS"); Chempower, Inc., an
Ohio corporation ("Chempower"); and Specialty Management Group, Inc., d.b.a/CCG,
a Texas corporation ("CCG").

At November 1998, the Company owned approximately 81.9% of the
outstanding common stock of USIS. The USIS Common Stock is traded on the OTC
Bulletin Board. In November 1998, USIS sold the assets, subject to the related
liabilities, of its subsidiary J.L. Manta, Inc. In December 1998, USIS sold its
P.W. Stephens Residential Inc. subsidiary, and in June 1999, USIS announced a
Letter of Intent to sell its P.W. Stephens, St. Louis subsidiary. USIS has been
engaged in asbestos abatement and lead hazard removal primarily in the Midwest.
USIS is seeking to refocus its strategic business plan in other businesses.

Up to the point of divestiture, the operations of each of the
subsidiaries of USIS are consolidated into the Company's financials. These
operations produced $15.1 million of revenue for the three months ended February
28, 1999 and $2.5 million for the three months ended May 31, 1999.

SEASONALITY AND QUARTERLY FLUCTUATIONS

The Company's revenues from its industrial support, environmental,
specialty fabrication, and construction management segments may be affected by
the timing of scheduled outages at its industrial customers' facilities and by
weather conditions with respect to projects conducted outdoors. Historically,
the Company has experienced decreased activity during the first quarter of a
fiscal year due to slower plant turnaround activity in the refinery and power
generating industries in the northern United States and Canada. The effects of
seasonality may be offset by the timing of large individual contracts,
particularly if all or a substantial portion of the contracts fall within a
one-to-two quarter period. Accordingly, the Company's quarterly results may
fluctuate and the results of one fiscal quarter should not be deemed to be
representative of the results of any other quarter or for the full fiscal year.

RECOGNITION OF REVENUES

The Company recognizes revenues and profits on contracts using the
percentage-of-completion method of accounting. Under the
percentage-of-completion method, contract revenues are accrued based upon the
percentage that accrued costs to date bear to total estimated costs. As
contracts can extend over more than one accounting period, revisions in
estimated total costs and profits during the course of work are reflected during
the period in which the facts requiring the revisions become known. Losses on
contracts are charged to income in the period in which such losses are first
determined. The percentage-of-completion method of accounting can result in the
recognition of either costs and estimated profits in excess of billings, or
billings in excess of costs and estimated profits on uncompleted contracts,
which are classified as current assets and liabilities, respectively, in the
Company's balance sheet.

RESULTS OF OPERATIONS

Three months ended May 31, 1999 compared to three months ended May 31, 1998

REVENUES

The Company's revenues increased 20% to $64.0 million in the three
months ended May 31, 1999 compared to $53.2 million for the same period in 1998.
The $10.9 million increase is due to the inclusion of Tony Crawford Construction
("TCC"), a division of CCG, and USIS which were not included in the three months
ended May 31, 1998. TCC was acquired effective March 1, 1999.

The Company's industrial support units produced revenues of $34.9
million in the three months ended May 31, 1999 compared to $39.3 million for the
same period in 1998. This reflects a decrease of 11.4% for the three months
ended May 31, 1999 compared to the same period in 1998. This decrease was due to
deferrals of major projects for two of the Company's industrial support units.

<PAGE> 12
The Company's specialty fabrication units produced revenues of $12.1 million in
the three months ended May 31, 1999 compared to $8.0 for the same period in
1998. This reflects an increase of 51.7% for the three months ended May 31, 1999
compared to the same period of 1998.

The Company's environmental/remediation units produced revenues of $1.0
million in the three months ended May 31, 1999 compared to $1.4 million in the
same period in 1998. This reflects a decrease of 30.6% for the three months
ended May 31, 1999 compared to same period in 1998.

The Company's construction management units produced revenues of $13.6
million in the three months ended May 31, 1999 compared to $4.4 million for the
same period in 1998. This increase for the three months ended May 31, 1999
compared to the same period in 1998 was primarily due to the aforementioned
acquisition of TCC.

The Company recognized revenues of $2.5 million for the consolidation
of USIS in the three months ended May 31, 1999. USIS was not consolidated in the
same period in 1998.

OPERATING EXPENSES

The Company's direct costs of revenue increased 24% to $55.1 million in
the three months ended May 31, 1999 compared to $44.5 million for the Second
Quarter 1998. Direct costs as a percentage of revenue increased to 86% in the
three months ended May 31, 1999 compared to 84% in the three months ended May
31, 1998. Increased costs are attributable to an increase in low risk, lower
margin maintenance work and construction management activity in the current
quarter and lower revenues in the higher margin industrial support business.
There is a focus on control of direct costs during the performance of contract
and maintenance work.

Selling, general and administrative expenses decreased 6% to $6.2
million in the three months ended May 31, 1999 compared to $6.6 million for the
three months ended May 31, 1998. The Company is focused on reducing its selling,
general and administrative costs in its existing businesses and at corporate.

PROVISION FOR INCOME TAX

During the three months ended May 31, 1999, the Company has recorded a
recovery of income taxes of $12 thousand based upon an effective tax rate of
34%. The effective tax rate was computed based on the statutory U.S. and
Canadian federal income tax rates, state and provincial tax rates. For the three
months ended May 31, 1998, a recovery of $0.8 million was reflected.

Six months ended May 31, 1999 compared to six months ended May 31, 1998

REVENUES

The Company's revenues increased 25% to $133.2 million in the six
months ended May 31, 1999 compared to $106.3 million for the same period in
1998. The $26.9 million increase is due to the inclusion of TCC, a division of
CCG, and USIS which were not included in second quarter 1998. TCC was acquired
effective March 1,1999.

The Company's specialty fabrication units produced revenues of $23.3
million in the six months ended May 31, 1999 compared to $21.6 for the same
period in 1998. This reflects an increase of 8% for the six months ended May 31,
1999 compared to the same period of 1998.

<PAGE> 13

The Company's environmental units produced revenues of $2.4 million in
the six months ended May 31, 1999 compared to $2.9 million in the same period
in 1998. This reflects a decrease of 16.2% for the six months ended May 31, 1999
compared to same period in 1998.

The Company's industrial support units produced revenues of $68.3
million in the six months ended May 31, 1999 compared to $70.1 million for the
same period in 1998. This reflects a decrease of 2.6% in the six months ended
May 31, 1999 compared to the same period in 1998. This decrease was due to
deferrals of major projects for two of the Company's industrial support units.

The Company's construction management units produced revenues of $21.6
million in the six months ended May 31, 1999 compared to $11.7 million for the
same period in 1998. This increase in the six months ended May 31, 1999 compared
to the same period in 1998 was primarily due to the aforementioned acquisition
of TCC.

The Company recognized revenues of $17.6 million for the consolidation
of USIS in the six months ended May 31, 1999. USIS was not consolidated in the
same period 1998.

OPERATING EXPENSES

The Company's direct costs of revenue increased 30% to $111.6 million
in the six months ended May 31, 1999 compared to $85.8 million for the six
months ended May 31, 1998. Direct costs as a percentage of revenue increased to
83.8% in the six months ended May 31, 1999 compared to 80.7% in the six months
ended May 31, 1998. Increased costs are attributable to an increase in low risk,
lower margin maintenance work and construction management activity in the
current quarter and lower revenues in the higher margin industrial support
business. There is a focus on control of direct costs during the performance of
contract and maintenance work.

Selling, general and administrative expenses decreased 7% to $11.7
million in the six months ended May 31, 1999 compared to $12.7 million for the
six months ended May 31, 1998. The Company is focused on reducing its selling,
general and administrative costs in its existing businesses and at corporate.

PROVISION FOR INCOME TAX

During the six months ended May 31, 1999, the Company has recorded a
provision for income taxes of $1.2 million based upon an effective tax rate of
34%. The effective tax rate was computed based on the statutory U.S. and
Canadian federal income tax rates, state and provincial tax rates. For the six
months ended May 31, 1998, a provision of $0.6 million was reflected.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash decreased from $21.8 million on November 30, 1998 to
$18.2 million at May 31, 1999. The Company utilized net cash in operating
activities of $16.3 million for the six months ended May 31, 1999 compared to
$6.0 million for the same period in 1998. The primary reason for the change is
an increase in overall working capital in several of the Company's businesses.
Accounts receivable increased from $50.1 million to $62.8 million.

Net cash used in investing activities was $0.4 million in 1999 compared
to $7.7 million in 1998. The primary use of cash in the first six months of 1998
was $5.0 million for the purchase of Dominion Bridge common stock.

<PAGE> 14

Cash flows provided by financing activities was $11.5 million in 1999
compared to $50.2 million in 1998, primarily due to proceeds from notes payable
and long term debt.

In May 1999, the Company and its principal subsidiaries entered into a
Credit Agreement with General Electric Capital Corporation as lender and agent
for additional lenders. The Credit Agreement provides for a revolving credit
facility (the "Revolver") of up to $30 million to be used for working capital
and other general corporate purposes and is based upon certain eligible accounts
receivable. The outstanding balance on the revolver is $12.1 million with unused
availability of $17.9 million. The Revolver has a two-year term, subject to two
automatic one year extensions at the mutual discretion of the Company and the
lenders. Borrowings under the Revolver will accrue interest at a rate equal to
2% above the commercial paper rate.

The Company's cash requirements consist of working capital needs,
obligations under its leasing and promissory notes, and funding for potential
acquisitions. The Company believes that its current cash position, the expected
cash flow from operations, and the anticipated availability of a line of credit
should be sufficient throughout the next 12 months to finance its working
capital needs, planned capital expenditures, debt service requirements and
acquisition strategy.

INFORMATION REGARDING FORWARD LOOKING STATEMENTS

The Company is including the following cautionary statement in its
Report on Form 10-Q to make applicable and take advantage of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and Section
27a of the Securities Exchange Act of 1934 for any forward-looking statements
made by, or on behalf of the Company. Forward-looking statements include
statements concerning plans, objectives, goals, strategies, future events or
performance and underlying assumptions and other statements which are other than
statements of historical facts. Certain statements contained herein are forward
looking statements and accordingly involve risks and uncertainties which could
cause actual results or outcomes to differ materially from those expressed in
the forward-looking statements. The Company's expectations, beliefs and projects
are expressed in good faith and are believed by the Company to have a reasonable
basis, including without limitations, management's examination of historical
operating trends, data contained in the Company's records and other data
available from third parties, but there can be no assurance that management's
expectations, beliefs or projections will result or be achieved or accomplished.
In addition to other factors and matters discussed elsewhere herein, the
following are important factors that, in the view of the Company, could cause
actual results to differ materially from those discussed in the forward-looking
statements: the ability of the Company to continue to expand through
acquisitions, the availability of debt or equity capital to fund the Company's
expansion program and capital requirements, the ability of the Company to manage
its expansion effectively, economic conditions that could affect demand for the
Company's services, the ability of the Company to complete projects profitably,
severe weather conditions that could delay projects, and litigations and
claims. The Company disclaims any obligation to update any forward-looking
statements to reflect events or circumstances after the date hereof.

IMPACT OF THE YEAR 2000 ISSUE

The Year 2000 Issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. Any of
the Company's computer programs that have data-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in other routine business activities.

Based on a recent assessment, the Company determined that it will be
required to modify or replace significant portions of its software so that its
computer systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue can be mitigated. However, if
such modifications and conversions are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the operations of the
Company.

Based on presently available information, the Company has initiated formal
communications with all of its significant suppliers and large customers to
determine the extent to which the Company is vulnerable to the failure of these
third parties to remediate their own Year 2000 Issues. However, there can be
no guarantee that the systems of other companies on which the Company's system
rely will be timely converted, or that a failure to convert by another company
or a conversion that is incompatible with the Company's systems, would not have
material adverse effect on the Company.

The Company will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. The
Company plans to complete the Year 2000 project within one year, but no later
than October, 1999. The total remaining cost of the Year 2000 project is
estimated at $1.5 million and is being funded through operating cash flows of
the Company. Of the total project cost, approximately $1.0 million is
attributable to the purchase of new software, which will be capitalized. The
remaining $500,000, which will be expensed as incurred over the next two years,
is not expected to have a material effect on the results of operations of the
Company. To date, the Company has not incurred any expense for its Year 2000
project and the development of a remediation plan.

The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates
will be achieved, and actual results could differ materially from such plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes and similar
uncertainties.

<PAGE> 15

IMPACT OF THE YEAR 2000 ISSUE

15
<PAGE> 16

PART II

OTHER INFORMATION

ITEM 1. LITIGATION

See Note 6 to the Notes to Consolidated Financial Statements
(unaudited) in Part I.

ITEM 2. CHANGE IN SECURITIES

During the second quarter, the Company issued 100,000 common shares for
services and payments. The issuances of these common shares were exempt from
registration under the Securities Act of 1933, as amended by virtue of Section
4(2) thereof.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 20, 1999, the Company held its Annual and Special Meeting of
Shareholders (the "Meeting").

The following persons were elected directors at the Meeting:

Barry Cracower
William A. Dimma
Hon. Donald R. Getty
Michael E. McGinnis
John C. Pennie

At the Meeting, in addition to the election of directors, the
shareholders (1) appointed PricewaterhouseCoopers LLP (formerly Coopers &
Lybrand LLP) as auditors for fiscal 1999, (2) approved a resolution amending the
Company's Stock Option Plan, and (3) approved a resolution authorizing the
Company to enter into private placement agreements during the twelve month
period following the Meeting.

The voting by shareholders at the Meeting was as follows:

FOR AGAINST WITHHELD
--- ------- --------
<S> <C> <C> <C>
Elect Directors 15,796,119 884,952
Appoint Auditors 16,097,945 169,700
Amend Option Plan 14,053,621 2,450,204
Authorize Placements 3,789,364 2,594,111
</TABLE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

27 Financial Data Schedule.

(b) Reports on Form 8-K.

<PAGE> 17

The Company filed a Form 8-K for an event of May 7, 1999 reporting
under Item 5 thereof the completion of a Credit Agreement with General Electric
Capital Corporation providing for a revolving credit facility of up to $30
million.

<PAGE> 18

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

AMERICAN ECO CORPORATION
(Registrant)

Dated: July 15, 1999 /s/ Michael E. McGinnis
-----------------------------------
Michael E. McGinnis
Chief Executive Officer

Dated: July 15, 1999 /s/ Michael Appling, Jr.
-----------------------------------
Michael Appling, Jr.
Chief Financial Officer

<PAGE> 19

EXHIBIT INDEX

Exhibit Description
- ------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> MAY-31-1999
<CASH> 18,155
<SECURITIES> 0
<RECEIVABLES> 62,805
<ALLOWANCES> 1,607
<INVENTORY> 23,156
<CURRENT-ASSETS> 148,715
<PP&E> 50,015
<DEPRECIATION> 1,179
<TOTAL-ASSETS> 268,569
<CURRENT-LIABILITIES> 39,391
<BONDS> 118,000
0
0
<COMMON> 21,676,482
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 268,569
<SALES> 64,034
<TOTAL-REVENUES> 64,034
<CGS> 6,188
<TOTAL-COSTS> 55,056
<OTHER-EXPENSES> 7,367
<LOSS-PROVISION> (34)
<INTEREST-EXPENSE> 1,645
<INCOME-PRETAX> (34)
<INCOME-TAX> (12)
<INCOME-CONTINUING> (22)
<DISCONTINUED> (1,231)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,253)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)

</TABLE>